I am a big geek when it comes to studying (and understanding) how people deal with money, and especially with their student loans. I recently saw a blog post where the author was talking about her inner struggles with controlling her spend: in her view, it was very hard to control her desire to spend on the things she wants to spend, and the rest of the article went on to explain her simple rule for what to spend on versus what not to.
But that’s not what caught my eye. What caught my eye was a statement she made almost in passing: she commented that life was too hard anyway, what with bills and obligations, and big student loans, that she felt entitled to a little indulgent spend every now and then.
Here’s why I was totally blown away by that little sliver of a phase: she was talking about her student loan commitments as if they were set in stone and all that was left to her was to helplessly just make the payments until the balance was all paid off. In other words, I didn’t see any hint or even an understanding that a student loan is not a monolothic, unchangeable thing set from on high where you are powerless to do anything other than continue the drudgery of making payments on it month after month, for an untold number of years until the entire sum is paid off.
And this is the biggest mistake I see people making when I talk to them.
I am not suggesting that you don’t have an obligation to pay off your student loans: of course you do. But there is a huge range of possible outcomes in how you choose to do it. And if you do it right, and the stars align, you could end up paying thousands or even tens of thousands of dollars less on your student loans over a lifetime.
And single steps carefully taken can end up saving you hundreds of times more money than all the gut wrenching budgeting and deprivation actions people typically think of when they talk about paying off their student loans faster.
Let’s talk specifics
Let’s talk about Laura.
Laura is a 29-year old physiotherapist working in a not-for-profit hospital. She’s married, lives in the Midwest, and has a toddler at home. She and her husband, Josh, both love kids and they plan to have another soon, hopefully next year. Josh has decided to be a stay-at-home dad for the time being.
Laura has $85,000 in student loans that she started making payments on recently. They made about $75,000 in taxable income last year mainly from her salary.
Laura is like many people I know. After she graduated, she was put on the 10-year standard payment as the default option, and she ends up paying about $1,044 every month due to her big student loan balance.
Because this puts a huge dent on their monthly budget, Laura is forever trying to cut expenses, cook food at home as much as possible, and constantly scrimping and saving to make sure she can pay off her loans
And herein lies the problem
While her efforts are laudable, Laura is making the exact same mistake that thousands of people in her situation make, and pay dearly for: she is assuming that the loan payment and her obligations are a given.
Let’s take a step closer and see what she’s missing out on:
First and most importantly, Laura is working for a non-profit that could qualify her for the Public Service Loan Forgiveness program. It’s not clear she is aware of that option, or more importantly, if she is even looking for one.
Secondly, she has not looked at any alternative repayment plans, even with lower chances of forgiveness: for example, any of the income-driven repayment plans could give her the option of having her loan balance forgiven at the end of 20 or 25 years even if she doesn’t qualify for public service loan forgiveness.
Third, she hasn’t asked around at her employer to see if they offer any student loan repayment as an employee benefit.
Does it really matter?
You can bet a nice, pricey, shiny new car that it does. Here’s how:
Public Service Loan Forgiveness is truly a divine option if you qualify for it, because borrowers working for a qualified non-profit, making 120 qualifying payments on an income-driven plan could have the entire remaining balance forgiven entirely tax free. Because Laura works for a nonprofit hospital, chances are she will qualify BUT IT WON’T HAPPEN AUTOMATICALLY!! She must look for it and take the steps needed to apply.
If she were to apply and get the PSLF forgiveness benefit, the total amount she will pay over the life of her loan (over the exact same ten years) will drop A WHOPPING $116,000 DOWN TO JUST ABOUT $44,000. That’s a saving of $72,000, enough for a luxurious new car, thank you very much!
And this doesn’t even count the “free money” she might be eligible to receive as part of her employment benefits package.
And she’s losing out on all this just because she simply assumed, like almost everybody I see or talk to, that there wasn’t much for her to do other than make payments.
Would you walk away without a second look if I had placed a check written out in your name for something like $72,000, but placed on a shelf just out of your sight, but not out of your reach?
I agree that getting forgiveness may not be as simple, but the point is the same: just for want of a little effort and agency, many borrowers stand to lose huge sums of money on their student loans.
You don’t want to be this person
You certainly don’t want to fall into the trap that Laura did. So what can you do to pull yourself up by your own bootstraps?
The steps are simple, free and within the reach of anybody:
- Understand how much you owe, and on what types of loans
- Most importantly, for your federal loans, go to the government’s website here, and run a few simple scenarios through the on-site calculator. This should give you a good sense of what forgiveness can do for your student loans.
- Check whether you’re better off on a different repayment plan than you are on right now. If so, take the steps you need to, to get on that plan
- Find out if you’re eligible for any employee benefits that will pay off your loans. Make use of them if they’re available
These steps will get you a huge part of the distance you need to cover, for not too much effort. The benefits may turn out to be massively worth it.
If you want more precise answers, drop me a note here:
skc at studentloanodyssey dot com
But in the meantime, do yourself a big favor, and look for those options